Pratiksha Ranchod
Introduction to Accounting
In the 15th century Luca Pacioli developed
the 1st method of recording business
transactions.
Accounting is a language used to record
financial transactions.
Users of financial information
Users of Financial Information
Financial institutions
Owners
Management
Employees
Suppliers
Investors
Government
Community
Customers
Uses of accounting information
Financial condition of the business
Profit or loss
Departmental performance
Which activities or products made profits
Make or buy?
Cost of production
Impact of existing and new policies
What changes should be made
Uses of accounting information
Increased volume of transactions
◦ Accounting records eliminate the need to
remember all the transactions
Enables business to compare results
Taxation authorities are able to rely on the
information prepared
Proper record keeping good evidence
Financial records basis for negotiations
Generally Accepted Accounting
Practice
GAAP – framework of accounting
standards, rules and procedures
IFRS – International Financial Reporting
Standards – used to be IAS
APB – Accounting Practices Board –
official accounting standard setter in
South Africa
The Balance Sheet
Assume we bought a house (property)
with a cost of R 750,000
We obtained a home loan to finance the
purchase of the property for R 500,000
How much did we have to contribute
towards the purchase of this property?
The Balance Sheet
The Balance Sheet therefore represents
What we
OWN
What we
OWE
Owner
Third Parties
Accounting Equation
What we
What we
Accounting Equation
What we
What we
Assets = Owner’s Equity + Liabilities
Accounting Equation
What we
What we
Assets = Owner’s Equity + Liabilities
R 750,000 = R 250,000 + R 500,000
Accounting Equation
Assets = Owner’s Equity + Liabilities
Owner’s Equity = Assets - Liabilities
Liabilities = Assets – Owner’s Equity
Introduction to Financial
Statements
There are three basic financial statements
which are important to understand how a
business is performing.
◦ Statement of Financial Position,
◦ Statement of Comprehensive Income
GAAP Principles
The business entity principle
The continuing “going” concern concept
The materiality principle
The principle of prudence
The objectivity principle
The time period concept
GAAP Principles
The revenue recognition convention
The matching principle
The cost principle
The consistency principle
The full disclosure principle
Principles
Definition
1
Business entity
A
Usually record income when invoice is issued
2
Continuing
concern
B
Outstanding lawsuits, disputes, pending mergers, etc. should be
included in the notes to the financial statements.
3
Materiality
C
The way/method in which something has been measured, has
remained the same from one period to the next.
4
Principle of
Prudence
D
Cost of sales relating to sales it helped to generate, must be recorded
in the same period as such sales
5
Objectivity
Principle
E
Accountant may leave out an adjustment in the books if it will make
no significant difference to the stakeholders’ interpretation of the
financial results.
6
Revenue
Recognition
F
Vehicles purchased by a business must be brought into the books at
the actual cost price – even if the asset was bought at a price much
lower than market value.
7
Time period
concept
G
Another accountant would have arrived at more or less the same
financial result.
8
Matching
Principle
H
The assumption is made that the business will continue to operate
indefinitely.
9
Cost Principle
I
Vehicle registered in sole trader’s personal name should not be listed
in the books of the business
10
Consistency
J
Financial results should always be subjective
K
Rather understate the value of assets & income, and overstate
liabilities & expenses
L
Financial year could be different from calendar year
Business Forms
Legal personality
Starting procedures
Obtaining capital
Ownership & management
Distribution of profits
Income tax
Sole Trader / Proprietor
Financial Accounting vs
Management Accounting
Financial accounting
Management accounting
Reports to stakeholders outside
the organisation: Owners, lenders,
SARS, regulators
Reports to stakeholders inside the
organisation – planning,
controlling, directing, motivation &
performance evaluation
Emphasis is on summaries of
financial consequences of past
events
Emphasis is on decisions affecting
the future of the organisation
Data must be objective &
verifiable
Data must be relevant and flexible
Precision of information is required
Timeliness of information is
required
Summarised for the entire org
Detailed segment reporting
MUST follow GAAP/IFRS/IAS
Not necessary
MUST report using AFS
No specific requirements
Management Accounting
Planning
Controlling
MGT
Leading
Organising
Transactions take place
Source Documents summarise the transactions
Journals summarise the source documents
The general ledger summarises the journals
The Trial Balance summaries the general ledger
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